Helloworld Travel (ASX:HLO) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Helloworld Travel Limited (ASX:HLO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Helloworld Travel

What Is Helloworld Travel's Debt?

The image below, which you can click on for greater detail, shows that Helloworld Travel had debt of AU$80.7m at the end of June 2021, a reduction from AU$100.5m over a year. However, it does have AU$131.0m in cash offsetting this, leading to net cash of AU$50.3m.

How Strong Is Helloworld Travel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Helloworld Travel had liabilities of AU$158.6m due within 12 months and liabilities of AU$139.6m due beyond that. Offsetting this, it had AU$131.0m in cash and AU$39.9m in receivables that were due within 12 months. So it has liabilities totalling AU$127.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Helloworld Travel has a market capitalization of AU$370.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Helloworld Travel also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Helloworld Travel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Helloworld Travel made a loss at the EBIT level, and saw its revenue drop to AU$68m, which is a fall of 76%. That makes us nervous, to say the least.

So How Risky Is Helloworld Travel?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Helloworld Travel had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$23m of cash and made a loss of AU$35m. Given it only has net cash of AU$50.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Helloworld Travel you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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